ENGG433/956-Spring-2019-Week-8
Question: 5.23; 5.24; 5.25; 6.11; 6.14; 6.16; 6.17
5.23 Activity-based budgeting LO4
Data Processors provides credit card services for the banking industry. It is preparing its budget for
2016, and, as it has been using activity-based costing, it intends to develop an activity-based budget
for 2016. The table below provides the actual cost driver rate for 2015, and the expected activity
levels for 2016.
2015 Actual cost
driver rate | 2016 Expected
activity | 2016 Expected activity
Activity (cost driver)  | Non-business
customers | Business customers
Transaction processing
(number of transactions) | $0.40  | 5,000,000  | 20,000,000
Statements (number of
statements) | 4.0  | 200,000  | 750,000
New credit cards (number of
credit cards) | 5.0  | 100,000  | 500,000
Billing disputes (number of
disputes) | 30.0  | 50,000  | 100,000Required
(a) What is the budget for the activities for 2016?
(b) Previously, Data Processors used a traditional line-item budget. What benefits will the organisation
gain by converting to the activity-based budget?
(c) How will the activity-based budget assist in reducing costs in the future?
(a) Data Processors – Activity-based Budget 2016
Activity  | Non-business
customers | Business
customers | Total budgeted
$
Transaction processing  | $2 000 000  | $8 000 000  | $10 000 000
Statements  | 800 000  | 3 000 000  | 11 000 000
New credit cards  | 500 000  | 2 500 000  | 3 000 000
Billing disputes  | 1 500 000  | 3 000 000  | 4 500 000
$4, 800 000  | $16 500 000  | $21,300 000
(b) A traditional line item budget will simply break the $21,300 000 down by cost items such as salaries, rent,
electricity, transport etc. The activity based budget will highlight which activities are incurring the costs, and with
the identification of the relevant cost driver it will provide a better means to manage the costs
(c) The activity-based budget will allow for cost reduction opportunities in the future as the identification of the
key drivers of cost will focus management’s attention on those attributes of the activities that cause costs.
5.24 Kaizen budgets LO4 Continuing from exercise 5.23, the financial controller of Data Processors
recently attended an accounting conference, which discussed the benefits of adopting kaizen
budgeting within an activity-based budget. After meeting with operational managers at Data
Processors it was decided to instill a continuous improvement approach to operations by reducing the
cost driver rate by 5 per cent in 2016 and a further 5 per cent in 2017.
Required
(a) Prepare the revised activity-based budget for 2016 and 2017.
(b) Are there potential behavioural consequences of adopting this kaizen approach to budgeting at
Data Processors?
Data Processors – Budget 2016 – Kaizen Budget